Banks Find a Gold Mine in Managing FDIC Assets
With real estate in a period of retrenchment that could last for the next five years, banks are discovering a new way to snatch fees from fiascos by helping the government to liquidate the troubled assets.
Fleet Norstar Financial Group and KeyCorp are among the most recent entrants to the great real estate liquidation bazaar. They are poised to compete for the lucrative business of managing and liquidating bad real estate loans and other assets for the Federal Deposit Insurance Corp.
About $9 billion in assets are being pared away from the balance sheets of Bank of New England and Goldome FSB, the failed banks Fleet and KeyCorp recently won the right to acquire.
If the banks' plans pan out, these management contracts will be just the beginning. The two banks will collect about $140 million dollars between them in fees from the government for managing and selling the bad assets.
Banc One Cashes In
The payoff is certainly enticing. Bonnet Resources, Banc One Corp.'s management unit, last year netted $53 million in fee income on about $2.5 billion of assets, said William P. Boardman, executive vice president of Banc One. But he said the expense was well worth it, because Bonnet collected $1.1 billion for the FDIC, he said.
"We've gotten back about $10 for every dollar we've spent," added Jim Ervin president of NCNB Corp.'s liquidating unit, Financial Resource Management.
All told, managers of RTC assets expect to collect $432.4 million in fees for liquidating sour real estate with a book value of slightly more than $23 billion.
An Edge in Bidding
Like Banc One and NCNB, which have mined gold from bad assets in Texas bank bailouts and put themselves in line for additional government contracts, Fleet and KeyCorp have used their initial contracts to stake out a claim in a region rich in real estate management opportunities.
Officials of the Fleet and KeyCorp predicted that their work in liquidating the BNE and Goldome portfolios for the FDIC will give them an edge as bidders, both by establishing a track record and enabling them to build their organizations.
"They'll be strong competitors to the extent that there is a preference by the FDIC to deal with a commercial bank," acknowledged Joseph E. Robert, chairman of J.E. Robert Co., an Alexandria, Va., firm that will compete against the banks.
The strategy could generate needed income at a time when the lending climate is very dry - and when the acquired banks remain a drag on profits. But competition with other providers could mean the yield from additional asset management contracts is less than the initial contracts seem to promise.
Moreover, it appears unlikely that asset management will become a permanent line of business for the banks, since the demand for asset liquidation will wane after the economy recovers.
Nurturing the Business
KeyCorp has had an eye on the asset management business for some time, and saw its acquisition of Goldome as a way to seed the business.
"We felt we needed the mass that comes from a Goldome. [Otherwise,] it didn't make sense to bid for FDIC or Resolution Trust Corp. assets," said Ralph M. Carestio an executive vice president who heads KeyCorp's management unit, KBW Services.
Thomas W. Lucey, who was appointed president of Fleet's Recoll Management Corp. three weeks ago, said the Fleet unit already has its eye on potential contracts on $2 billion to $3 billion of bad assets in the portfolios of some New Hampshire banks that will be seized by regulators.
Mr. Carestio, formerly head of real estate for NCNB (though not in its liquidation unit) estimated that the regulatory agencies will need managers for some $40 billion worth of assets from failed northeastern banks and thrifts over the next five years.
That would mean hundreds of millions of dollars in fees for the banks, if they can dominate the bidding to manage the assets for the Resolution Trust Corp. and the FDIC.
The RTC has already awarded contracts to manage and liquidate more than $23 billion of thrift assets - for fees projected to total more than $432 million - and the FDIC is expected to begin awarding contracts shortly on portfolios of assets from banks. The big deals the FDIC has made so far were entered as part of agreements to sell whole banks.
The fees - which are structured to encourage an efficient liquidation of assets into the private sector - are not only substantial but also free of the risk banks usually associate with real estate work.
But the banks' fees will have to come down somewhat as a percentage of assets under management if they are to win contracts in competitive bidding. The asset management contracts Fleet and KeyCorp have won with their acquisitions are inextricably linked to the broader agreements under which they acquired the banks, and do not reflect market pricing, bankers and asset managers said.
Moreover, the two banks will face plenty of competition. Since its inception in August 1989, the RTC has awarded contracts to well over 60 firms.
Fees Could Plummet
Some market sources said the competitive bidding process could result in fees that are only one-third as high as the terms of the banks' initial contracts allow, relative to the liquidation price of the assets in question.
Mr. Erwin of NCNB's Financial Resource Management, which has become the leading servicer of RTC assets in addition to its initial mission liquidating bad assets from First Republic Bank, acknowledged that the bidding process tends to reduce the fees.
But he also said it is unfair to compare the initial management contracts banks receive when acquiring a failed bank to openmarket transactions.
In NCNB's case, he noted, the bank received 2% of the first $2.4 billion collected - in addition to its management fees - from asset liquidations related to NCNB's acquisition of First Republic. That would appear to be a windfall, until you consider that it was granted as an alternative to other forms of government assistance the bank sought during negotiations.
"If you do an outstanding job," he added, "you probably can make more under the FDIC service agreements" than under individual management contracts with the RTC.
Extra Expenses with FDIC
For one thing, the FDIC contracts entail incentives to sell in addition to overhead costs, whereas the RTC contracts entail a fee, minus some administrative expenses that are performed by the agency.
Officials of NCNB and Banc One were sensitive to criticism leveled at the government for paying too much for the liquidation service under the bank bailout agreements.
Indeed, it is that kind of success that motivated the FDIC to enter similar contracts with Fleet and KeyCorp.
Initially the two units will have plenty to do without looking for additional work.
Although the three-year put options awarded to the acquirers offer some flexibility in deciding which assets to keep and which to shed, bank officials currently anticipate that KeyCorp will put about $800 million worth back to the FDIC, and Fleet is expected to put back about $8 billion.
Mr. Carestio anticipates hiring 175 to 300 people to staff KBW, which is under contract to manage the Goldome assets, and Mr. Lucey, foresees a staff of 900 to 1,000 people will be needed to handle RECOLL's Fleet assignment.
NCNB, faced with 250,000 claims on more than $9 billion of assets from its acquisition, had more than 1,500 people on staff at one time, Mr. Erwin said.
While officials of the two northeastern banks both said they intend to take on additional contracts, neither one appears ready to take on work for pension funds, insurance companies, or others in the private sector that may possess troubled real estate.
For one thing, the liquidation subsidiaries are closely supervised by the government agencies, which insist that the companies focus on their government work. This means a separate staff would have to be established for the new work.
Even NCNB's Financial Resources Management, which has spun off a substantial portion of the assets it originally was created to contend with, has no thought of expanding beyond government work. "Right now, we have all the opportunities we could want to say grace over with the RTC," Mr. Erwin said.
Top 10 RTC Asset Managers
Ranked by estimated fees over duration of contracts, which are generally for three years. Dollar figures in millions. Number of Book value contracts Fees of assetsNCNB 5 $49.7 $3,544.7J.E. Robert Cos. 2 45.1 2,419.8BEI 8 43.5 2,244.5North Corp. Realty 7 30.5 1,142.6Ralph Edger Group 11 19.8 812.7Coopers & Lybrand 2 13.8 682.3Altschuler, Melvoin & Glasser 2 13.6 1,088.0Beverly Group 2 13.3 597.9CLSAM Joint Venture 1 12.2 565.2Prentiss Property 1 10.7 497.0Top 10 totals 41 252.0 13,594.7All RTC asset managers 126 432.4 23,237.0